Minnesota Reverses Its Position: Sales of Optional Maintenance Contracts Are Subject to Sales Tax

Monday, December 10th, 2012


The Minnesota Department of Revenue (DOR) has released a new revenue notice explaining that it has reversed its position and now views optional maintenance contracts as subject to sales tax. Minn. Revenue Notice No. 12-12 (Dept. of Revenue Nov. 26, 2012).

Prior to this notice, the DOR's long-standing position had been that sales of both optional maintenance contracts and optional warranty contracts were not subject to tax. But, the DOR has re-considered and changed that position. Now, the DOR considers sales of optional maintenance agreements to be taxable, while optional warranty contracts continue to be not subject to sales tax.

To explain its change in position, the DOR clarified the distinction between a maintenance contract and a warranty contract. The DOR defined a maintenance contract as "a contract under which the specific repair and replacement parts and consumable items needed to maintain the equipment are provided at no additional cost . . . and the taxable items provided under the contract are more than de minimis compared to the cost of the contract." By contrast, the DOR described warranty contracts as acting like "insurance against future unexpected repair costs," so "neither the customer nor the seller knows at the time the contract is signed whether anything will be provided under the contract."

The DOR reasoned that maintenance agreements are bundled transactions because they combine more than one easily distinguished products such as repair labor, general services (like cleaning or inspection), replacement parts, and consumable items. The DOR determined that the cost of repair parts and consumable supplies, which are used in rendering the combined services, cannot be considered insignificant. Therefore, as bundled transactions, such maintenance agreements are subject to tax.

In sum, Minnesota taxes sales of equipment maintenance agreements that provide repair and replacement parts and consumable items at no additional cost, while warranty contracts that cover future unexpected repair costs and do not include consumable items needed to maintain the equipment are not subject to sales tax in Minnesota.

Also, this change in interpretation does not affect optional software maintenance contracts, which are governed by specific provisions in Minnesota's sales and use tax regulations. See Minn. R. 8130.9910, subpart. 2. Furthermore, the DOR also updated the section in its revenue notice for the printing industry that addresses sales of maintenance contracts. Minn. Revenue Notice No. 93-03 (Dept. of Revenue rev. Nov. 26, 2012).

About TTR

Transaction (buying or selling things), Tax (the tax on this activity), Resources (our people, our website, our support services) - TTR, Inc.

TTR has a website that companies subscribe to and use daily. This website provides a list of everything that can be bought or sold in the U.S. It provides simple answers to whether buying or selling these items is taxable (subject to a sales tax or other tax), and it provides all the legal authority to support these tax answers.

TTR likes to keep things simple and fun, which is why it has great people who provide help to clients on any support questions they have about transaction tax issues.

Please visit TTR on the web at www.ttrus.com or call 866.578.8193.

Economic Nexus in Washington

Monday, August 13th, 2018 -Effective October 1, 2018, certain out-of-state businesses will be required to collect and pay Washington sale...

Economic Nexus in Michigan

Thursday, August 9th, 2018 -Effective October 1, 2018, certain out-of-state sellers will be required to collect and pay Michigan sales or ...

Georgia Suspends Tax on Jet Fuel

Wednesday, August 8th, 2018 -Effective August 1, 2018, Georgia no longer collects state level sales and use tax on jet fuel. Georgia tax...

Employment Services Contracts for Permanent Employees Not...

Monday, August 6th, 2018 -The Ohio Board of Tax Appeals recently addressed whether contracts entered into by an employment services agen...

Alarm Systems and Monitoring Not Taxable in Missouri

Wednesday, August 1st, 2018 -The Missouri Department of Revenue recently released a ruling determining that (1) security, fire, tornado, an...

Economic Nexus in Utah

Wednesday, August 1st, 2018 -Effective January 1, 2019, certain out-of-state sellers will be required to collect and pay Utah sales or use ...